Divorce and Its Impact on Retirement Assets in Pennsylvania
One of the biggest challenges for couples facing divorce in PA and elsewhere, is how pensions or retirement savings are divided.
It always helps to start with a basic understanding of retirement benefits and their treatment in a Pennsylvania divorce. In Pennsylvania, any part of a pension or retirement benefit that was earned during the marriage is considered marital property. It is no different from a car, house or bedroom set that was acquired during the marriage. That which was earned before or after the marriage is not included as part of the marital estate.
Because every case is different, there is no way to sufficiently cover all the specifics that might affect one divorce or alternative dispute resolution over another (in a blog), but I want to try to explain some of the basics regarding retirement savings distribution.
There are two predominant forms of retirement benefits. The first is known as a Defined Benefit Plan. A Defined Benefit Plan specifies the amount of the benefit the employee will receive upon retirement. The benefit is defined within the plan and is determined by years of service and the compensation the employee earned during employment. With some exceptions, the employee does not have the ability to receive a lump sum distribution from the plan but rather will receive a monthly benefit upon retirement. Examples of Defined Benefit Plans include the State Employees’ Retirement System (SERS), the Public School Employees’ Retirement System (PSERS) and several Federal pension plans (CSRS, FERS).
The second most common kind of retirement benefit is known as a Defined Contribution Plan. The employer and employee specify the amount that is being contributed to the plan. The present value of the plan is easily discernable from paper statements provided to the employee or from on-line account inquiries. Types of Defined Contribution Plans include ESOPs, SEPs, Profit Sharing Plans and 401(k)s.
When it comes to determining how retirement benefits will be divided, it is necessary to first know what kind of plan we are talking about. Once we know that, then we can begin to examine the options. These include Immediate Offset or Deferred Distribution. An Immediate Offset allows one party to retain the retirement benefit in exchange for another asset in the marital estate. Deferred Distribution occurs when the benefit is split for distribution in some proportion between the two former spouses when the employee spouse enters retirement and begins to collect the pension benefit.
Because most retirement benefits are funded with tax deferred money, it is important to take caution in dividing these assets so as not to trigger an immediate tax consequence. Funds can be transferred from an employee spouse’s plan to their former spouse as part of their divorce proceeding while still preserving that tax deferred status.
For more information on this topic or any other topic related to issues of divorce, custody, support or family law in general, please contact me or call (800) 615-0115.